Nonlinear Earnings Dynamics and Inequality over the Life Cycle: Evidence from Japanese Municipal Tax Records

This paper examines life-cycle earnings risk and income inequality in Japan using municipal administrative tax records covering 2011–2021. We estimate an agedependent quantile model that decomposes idiosyncratic earnings into persistent and transitory components, allowing persistence to vary nonlinearly with individuals’ positions in the earnings distribution and the size of shocks. We find that persistence is high for shocks consistent with an individual’s earnings history but falls sharply for “reversal” shocks, which may represent career changes. Cross-sectional analysis shows that households pool income effectively: equivalized household income displays lower dispersion and a J-shaped life-cycle inequality profile compared to a monotonically rising profile for individual earnings. However, impulse response analysis reveals that when individuals or households at a given percentile of the persistent component distribution receive either a high or low percentile draw from the innovation distribution, the resulting earnings changes are larger for equivalized household earnings than for the earnings of the household head alone. This indicates that household and individual earnings distributions have distinct dynamic properties, with household-level responses potentially reflecting correlated spousal shocks, joint labor supply decisions, and demographic adjustments.